Mexican Hotel Market Awash in Offshore Capital

The Mexican hotel market is benefiting from a wave of global liquidity, according to a joint research report from Jones Lang LaSalle Hotels and Mexico’s National Trust for Tourism Development (FONATUR).

The recent analysis notes that foreign investment in Mexican hotels hit $640 million in 2006, or an annual compound growth rate of 135%. In 2005, $369 million in foreign capital flowed into this market.

“The recent surge of foreign investment in Mexico’s lodging industry continues to be driven by a welcoming business climate, substantial infrastructure development, growing transparency, economic and political stability, improving credit ratings and a global capital market that is awash in liquidity,” says Miami-based Miguel Rivera, a senior vice president at Jones Lang LaSalle Hotels.

A handful of Pacific beach resorts lured most of this capital. According to Rivera, Cancun and the Riviera Maya — both of which occupy Mexico’s eastern coast along the Caribbean — captured $1 billion in hotel investment from both domestic and foreign buyers last year. That total represented 57% of all capital flows into the Mexican hotel market last year.

“Cancun hosts the largest amount of flights of any tourism destination in the country,” says Gary Swedback, president of real estate network NAI Mexico. “Hurricane Wilma in 1995 also created some unusual investment opportunities. Foreign investors quickly purchased distressed assets from local owners and participated in the $1.5 billion makeover last year,” adds Swedback.

For example, Spanish developer OHL invested roughly $375 million in the Mayakoba project last year. This master-planned project will bring luxury hotel and residential units to the Riviera Maya region. The second most popular destination for foreign capital was Los Cabos, which drew $206 million (or 11% of the annualized total) in investment capital last year.

Los Cabos also has the most active hotel development market in Mexico, says Rivera, adding that this remote resort area is popular with American tourists. Los Cabos is located on the southern tip of Baja California, a thin peninsula that juts to the south below Tijuana.

Jones Lang LaSalle Hotels expects foreign demand for Mexican hotels to remain strong through the next two years. The company projects that an average of $900 million in foreign capital will hit the market annually through 2009, doubling the three-year average achieved between 2004 and 2006. Kristina Paider, senior vice president of research and marketing for Jones Lang LaSalle Hotels, expects roughly $650 to $700 million in foreign capital to enter the Mexican hotel market.

“Mexico is ready for large amounts of additional investment to infrastructure and tourism projects,” says NAI Global’s Swetnum.

One variable that could hurt room demand is the ongoing battle between Mexican police and well-entrenched drug traffickers. Mexico lost 1,600 inhabitants to organized crime in 2005. The death toll climbed to 2,200 last year, and more than 1,200 Mexicans were victims of organized crime through the first five months of this year alone.

Rivera of Jones Lang LaSalle says that much of the drug-related violence is localized in interior regions along the U.S. border, which aren’t typically viewed as tourist destinations. Says Rivera: “I don’t think it will have any major impact on hotel capital flows.”